INNOVATION AND PRODUCTIVITY GROWTH

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1 INNOVATION AND PRODUCTIVITY GROWTH by Dale W. Jorgenson Samuel W. Morris University Professor Harvard University Theodore W. Schultz Lecture Agricultural and Applied Economics Association Atlanta, Georgia January 3,

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3 SCHULTZ ON PRODUCTIVITY GROWTH The puzzle confronting economists has been that the rate of growth of output that was being observed has been much larger than the rate of increase in the principal resources that were being measured. It is now clear that this puzzle is of our own making because we have been using measures of capital and labor which had been refined and narrowed in ways that excluded many of the improvements that have been made in the quality of these resources. Theodore W. Schultz (1962), Reflections on Investment in Man

4 INNOVATION AND PRODUCTIVITY GROWTH: OUTLINE New Framework for Measuring Productivity New Architecture for the U.S. National Accounts Economic Impact of Innovation Investment versus Innovation

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7 NEW FRAMEWORK FOR MEASURING PRODUCTIVITY Constant Quality Labor Input Constant Quality Capital Input Production Possibility Frontier EU KLEMS: 25 of 27 EU Members; Australia, Canada, Japan, Korea, and the U.S.

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9 MEASURING INNOVATION IN THE 21ST CENTURY ECONOMY The proposed new architecture for the NIPAs would consist of a set of income statements, balance sheets, flow of funds statements, and productivity estimates for the entire economy and by sector that are more accurate and internally consistent. The new architecture will make the NIPAs much more relevant to today s technologydriven and globalizing economy and will facilitate the publication of much more detailed and reliable estimates of innovation s contribution to productivity growth. Advisory Committee on Measuring Innovation in the 21 st Century Economy to the U.S. Secretary of Commerce (2008)

10 MEASURING CAPITAL SERVICES 2008 By associating these estimates with the standard breakdown of value added, the contribution of labor and capital to production can be portrayed in a form ready for use in the analysis of productivity in a way entirely consistent with the accounts of the System. United Nations (2009), System of National Accounts 2008, Volume 2, Chapter 20

11 MEASURING CAPITAL SERVICES 1993 The net operating surplus is an accounting residual which does not possess quantity and price dimensions of its own. It may also be negative, of course. It is not possible, therefore, to decompose the net operating surplus into its own price and volume components. United Nations (1993), System of National Accounts 1993, Chapter 16

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13 1979: Rees Report BLS/BEA TIMELINE 1983: BLS TRENDS IN MULTIFACTOR PRODUCTIVITY 1994: BLS Constant Quality Labor Index 2006: Jorgenson, Landefeld, and Nordhaus, A NEW ARCHITECTURE FOR THE U.S. NATIONAL ACCOUNTS 2008: Advisory Committee on Measuring Innovation in the 21 st Century Economy 2008: Completion of EU KLEMS Project: International Comparisons of 25 of 27 EU Member Countries, Australia, Canada, Japan, Korea, and the U.S. 2009: BEA/BLS Aggregate Production Account

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15 MEASURING PRODUCTIVITY AT THE INDUSTRY LEVEL Develop annual, industry-level measures of total factor productivity by restructuring the NIPAs to create a more complete and consistent set of accounts integrated with data from other statistical agencies to allow for the consistent estimation of the contribution of innovation to economic growth. Advisory Committee on Measuring Innovation in the 21st Century Economy to the U.S. Secretary of Commerce (2008)

16 U.S.D.A. TIMELINE 1960: First Official Measure of Total Factor Productivity 1980: Gardner Report 1991: Revised Official Measure of Total Factor Productivity 1999: First Official Measure of Total Factor Productivity by State 2007: International Comparisons of the US and the EU

17 SOURCES OF U.S. AGRICULTURAL GROWTH Average annual growth rates, weighted by the income share Annual contribution (%) Labor Hours Labor Quality Non-IT Capital Services IT Capital Services TFP

18 SOURCES OF U.S. ECONOMIC GROWTH Average annual growth rates, weighted by the income share Annual contribution (%) Labor Hours Labor Quality Non-IT Capital Services IT Capital Services TFP

19 SOURCES OF WORLD ECONOMIC GROWTH Average annual growth rates, weighted by the income share Annual Contribution (%) World G7 Developing Asia Non-G7 Latin America Eastern Europe Sub-Saharan Africa N. Af rica & M. East Hours Quality Non-IT Capital IT Capital TFP

20 INNOVATION AND PRODUCTIVITY GROWTH Implementation of the New Framework for Productivity Measurement Implementation of the New Architecture for the U.S. National Accounts Economic Impact of Innovation: A New Perspective on Policy Investment versus Innovation: A New View of Growth Economics